Private Sector, Public Good

What role, if any, does business have in creating social good? A new seminar series at Harvard Business School tackles this complex question.

by Dina Gerdeman

Should business play a role in supporting public institutions, and perhaps addressing the world's social challenges?

When Harvard Professor Rebecca Henderson asked her colleagues and business executives that question over the last few years, the reaction was often rather skeptical. Many believe this is not what business does or should do, Henderson said.

“If managers can support public institutions and provide public goods and make money, why aren't they?”

"They say the answer is regulation or the answer is taxation," said Henderson. "The idea that firms can set themselves up for public good is viewed with suspicion—in my view for very good reasons."

Yet more than three dozen faculty and doctoral students from a variety of institutions gathered January 30 to give the idea serious consideration during the first of 13 HBS workshops on the subject. The Business and the Public Sector seminar series, which runs through May, is designed to induce lively conversation, build a community of scholars, and create a research agenda exploring the possible role of the private sector in shaping the institutions of capitalism.

Henderson, who co-hosted the event, began her presentation by suggesting that talking about business and the public sphere was like "dancing about architecture." Business often has no incentive to grapple with public sector problems, and those businesses that choose to embrace a 'stakeholder' orientation may be perceived as misusing shareholder funds or as trying to subvert democratic institutions, she said.

She suggested, however that there are three reasons to at least explore the topic including:

Growing global corruption, particularly when business gets close to the public sector and tries to skew the rules in its favor.

Environmental pressures, including the risk that we could destabilize the climate through the emission of green-house gases.

Poverty and inequality, with fewer people taking greater pieces of the earnings pie.

"Should business get involved?" Henderson asked the group. "If I could choose, I'd like a renewed democratic process and appropriate regulatory regimes. I believe that these problems are usually best dealt with by the state, but in many cases that is not happening." Moreover the private sector has resources and capabilities that the public sector does not and, potentially, a substantial business interest in seeing the public sector succeed. "Sitting in a business school, this is something we should look at very seriously."

Henderson noted that there are opportunities for firms to address public goods problems and make money at the same time, citing the example of IBM reducing electricity consumption significantly between 1990 and 2012 and saving $477 million in the process.

The role of academics in this process, she said, is the traditional one: to think clearly, see what is true, not what we wish was true. "Once we are thinking clearly about these things, (we) can be a source of ideas in the world."

Potential Inquiry

Henderson identified two broad areas of inquiry to consider. First, she suggested it might be worth exploring the potential role of "inducement" mechanisms—including regulations, taxes, and ownership structures—in changing the constraints under which firms operate. Are there changes that would make it easier for business to contribute to the public good? Would these kinds of shifts be desirable or would they have unexpected side effects?

And second, she posed the fundamental question of whether it is feasible or desirable to think about changing firms themselves. Can firms create shared value? Can industries regulate themselves? What are the responsibilities of managers? Does "purpose" matter?

If academics chose to focus on these particular areas of study, it just might provide the kind of encouraging push that companies sometimes need to make changes.

"You might ask, why should one do research in this area? If managers can support public institutions and provide public goods and make money, why aren't they?" she said. One of the goals of the research is to explore exactly this question, particularly since if this is a question of coordinating efforts, highlighting the risks and benefits of action may help to create a critical mass of firms working together.

"Could we build a private sector in which actively subverting accounting rules was widely agreed to be bad behavior? Can we imagine firms mutually agreeing not to try and capture their regulators? To support appropriate environmental or social legislation? If a significant faction of the private sector started to act in this way consistently, might it change public attitudes and beliefs about how to act properly? Possibly," she said. "Could they potentially put social pressure on CEOs who are acting badly?"

Global Threatens Local

Harvard Business School's Jan W. Rivkin, the Bruce V. Rauner Professor of Business Administration, said that historically in the United States, government and business created a set of public goods that were beneficial for everyone. But around 1980, a shift occurred as a result of changes in geopolitics and other factors that made it possible for firms to do business "from anywhere to anywhere," he said. This not only weakened the connection between companies and their communities, but also put pressure on the middle class, which were suddenly in competition for jobs with skilled workers around the globe.

"And how did our society respond to pressures on the middle class?" Rivkin asked. "The dominant response of our society was to make a series of unsustainable promises that sustained the illusion of prosperity" by extending easy credit to fuel consumption, covering health care and retirement costs, and directly employing people while lowering tax rates.

"You take that and combine it with the recession and two wars, and you have a hobbled government that is not making investments in the commons," Rivkin said.

Many companies have recognized the problem and are already making investments in public goods, he said. For example, Southwire, a manufacturer of electrical wire, cable, and cord in rural Georgia, partnered with a local school district that had a dismal graduation rate. The company staffed its factory with the district's most at-risk kids, leading to a graduation rate that soared among those students as well as other at-risk students.

The evidence that more businesses and their "purpose-driven managers" are investing in society also comes from CEOs at several multibillion-dollar organizations, including Unilever, Nestle, Nissan, United Stationers and Aetna, who are trying to simultaneously make money and make a difference. Thousands of smaller firms are also creating change.

"My reading of some of these CEOs is that they're charging and looking back over their shoulders saying, 'Come on, guys. We can get to another place," Henderson said. Many other executives are concerned enough about the social problems we face that they may also be willing to jump on board and do their part.

During visits to companies, she said, executives always stress the money-making part of business. But during social get-togethers with these same executives, they admit to also being worried about the world and the future for their children.

"The students here and the global leaders I meet are beginning to think quite hard about addressing their role in these problems," Henderson said. "There is so much power at firms. They have the ability to make a difference."

Henderson is the John and Natty McArthur University Professor at Harvard University, with a joint appointment at Harvard Business School and co-director of the Business and Environment Initiative.

The seminar series is being sponsored by the Division of Research and Faculty Development at Harvard Business School.

About the Author

Dina Gerdeman is a senior writer for Harvard Business School Working Knowledge

Ram Poddar

Chief Mentor, Godfrey Phillips India Limited

CEO's role and duty is to work in accordance with the charter of objectives approved by its shareholders and to serve in the best interest of its stakeholders. What he does, of course, has to be in compliance with the applicable laws of the land. All the commercial activities of the corporation should make social sense and all his social investments should make commercial sense for the corporation.

Kapil Kumar Sopory

Company Secretary, SMEC(India) Private Limited

That the private sector also needs to contribute to public (social) good has since been recognised in India as well as in many other countries. In India, we are aiming at inclusive growth. So as to enforce companies to compulsarily expend on social needs, Corporate Social Responsibility (CSR) has been given a pride of place in the Companies Act 2013 by providing that all companies falling within the norms fixed spend at least 2% of their net profits on CSR activities.
Private sector is also joining the developmental programs of the public sector by way of Public-Private-Partnerships (PPP).
It is not likely that in future private sector will be able to shun to support public sector one way or the other.

Lavesh Agrawal

Self Employed

As we are living in a very materialistic society now, question we also need to ask "what will CEO get doing this?" Fame or respect or self-satisfaction? And do CEO looking for any of these?
We are seeing many retired CEOs are doing a lot in social sector but probably did not have time to think about it when they were in office. I think in a capitalistic environment people think more on top-line, bottom-line, taxes, my-job, competition, etc rather than what they would be leaving for their future generations?
A lot of organization are doing charity in the name of social services but I feel that is worse than not doing any thing. Every charity ends up making some more beggars on the earth and this should not be done unless it is for the people who are not in productive age.
I am strong believer that if every organization can spend their efforts in creating new batch of human power for their own organization's future need, we would be able to see a planet with more skilled human resources, which will help us in prospering the whole world and reduce inequality.
Thanks

Subhasis Ray

Associate Professor, XIMB India

A valid question, Dina. Unfortunately precedents are so stacked against this option of private management of public goods ( particularly in emerging countries) that we have to be careful about the research design. India is seeing privatization of water ( and other public good) in a big way. My view is look at best cases and ask a) why they were required and b) how to ensure they do not go the usual way of misappropriation.

Hugh Quick

home, None

Businesses, like everybody, influence the world around them. They cannot stop that, so of course the way they behave matters

Patrick

md/ceo, compare the business ltd

This is welcome development. I wish it embraced globally.

Laura Berry

co owner, Eugene Social

Now more than ever companies can benefit from Pubic Good campaigns because of the huge and growing reach of Social Media through Facebook, Twitter, LinkedIn, Google+ etc. Consumers will opt for companies helping better the world they live in. laura@havepresence.com http://havepresence.com

SUMAN

MANAGER, WBSEDCL

The society is represented by public and business is the process of proper distribution of the different resources in different acceptable forms to the public in the most efficient way.Business,whether it may managed by private or public can not sustain without a capable group of public to support it by being the customer or the worker.So it is always profitable to have a customer base of good average income & a efficient workforce to support the business activities.But it is not that the private company should make a loss to run public good,that is not sustainable,but can operate the activity for the public good with a view of the future to increase its profit not by margin but by volume.This can be run side by the main business,ultimately it will develop the goodwill of the company in the society which help the company to grow further in the long run by the support of purchasing power & the local help in operation.

Let's take a small example from India.Much before the CSR(Corporate social responsibility) is made mandatory as a rule the TATA in a large scale engaged into public good by developing academic institute,implementing town planning etc,this activities of public good does not burden TATA Group but enhanced the Business prospect by creating its brand image,today it is loved by all the citizens and most of the states of India is willing to have a factory of TATA where getting land for industry is a big issue.If the Public Good have to be seen as a option of business and a way of direct profit,then the focus should be oriented to more of less efficiently managed activities by the government(like water management,electricity distribution,township management etc),where the private company can reduce the cost of operation by proper cost management & can make direct profit.

Robert F. Abbott

Author, Word Engines Press

Go through the roster of Fortune 500 companies and you will see the majority of shares in most of them belong to institutional investors (pension funds, mutual funds, and other investment vehicles). This means much of the income of big business funds the retirement of middle class citizens: teachers, truck drivers, and others. California's public employees (CalPERS), for example, owned almost 3 million shares of McDonald's (as of December 31, 2013), and will likely collect some $9 million in dividends this year. As I pointed out in my book, Big Macs & Our Pensions, modern corporations already have big role in social policy, and that is to provide and grow retirement incomes.

D Scott MacDonald

Secretary/Treasurer, Summit Equipment, Inc.

Maybe I'm nervous about the third of the three reasons given for exploring this topic only because of the way it's worded. Saying "fewer people taking greater pieces of the earnings pie" seems to imply that phenomenon must be unfair, ignoring the possibility that those "taking" are actually "earning," and presuming that well-being is a zero-sum game in which, if one person advances, another person, somewhere, must be set back. Management's duty is to serve shareholder interests. That does not preclude serving a public interest, though shareholders often need effective leadership to persuade them of the longer-term benefits from doing so.

Dr Shadreck Saili

Management Consulatant

From a legal point of view a business entity is a person like any human being and is therfore expected to behave in the same manner as a human being would in terms of support to the puplic goods and the alike

Yvonne Barnes

Doctoral student of Northcentrl University, Less than one

I see the private industry of America becoming the employers of the world! Why? We can do so by addressing the needs of the world as well as our own society. When people leave the only home that they know to come to America they want freedom and equal opportunity. We can't give them freedom in they're countries but we can take opportunity to them.
Example: Of the Latino population here there are many well trained doctors, nurses, physical therapist etc.. Why not officer them a medical franchise to take back to their own country and show them how they can really make a difference to their homeland instead of just running away?